Dec 25, 2014

Oil Contracts – Don’t Kill the Success Story

Oil Contracts – Don’t Kill the Success Story New Delhi, Delhi, India : India has discovered more than 200 blocks since the inception of NELP rounds. However, only around 30 have been put into production. India’s last major discoveries were – Reliance KG-D6 Basin & Cairn’s oil fields in Barmer more than a decade ago. Clearly, there is a deficit & the time has come for the pro-investment Narendra Modi Government to spur investment and growth in domestic exploration and production.

Remember, more than US$16 billion of investments have been committed and more than US$5 billion of investments have been promised in the sector. Reserves in excess of 700 million metric tonnes have been discovered. Still, the objectives of NELP have not been fulfilled effectively.

Relevant insights show us that NELP may not have always allocated blocks efficiently. So, while area of unexplored basins under NELP has steadily decreased, the areas of poorly explored blocks have remained largely unchanged. This highlights a holdup problem - Large areas have been won and appropriated but have not been explored properly.

Simultaneously, failure to fulfil exploration commitments has, in turn, led to insufficient available information and this has reflected negatively upon India’s resource potential.

And that’s not where the trouble ends. The Government’s intention to bring in a revenue sharing model to replace the present production sharing contract has produced a telling effect on private companies willing to engage in domestic exploration and production with the following clauses acting as deal breakers:

Establishment of escrow account, where all revenues are deposited and government can protect its share

Restriction on contractors’ access to revenue

Penalties if actual volume is less than the committed volume by more than 25%

No scope to lower government’s share if actual capital expenditure is higher than committed capital expenditure.

This model is sure to restrict growth in domestic exploration and production. India imports more than 80% of its domestic crude need. Given the scenario, if the revenue sharing model is introduced, it while drive away present and potential investors who have the capacity to unlock the hydrocarbon deposits of the country.

It takes more than US$ 10 million to dig a well onshore and over US$ 150 million in offshore, and that too, with no assurance of finding oil. In this investment, risk-heavy sector, if upstream companies are not allowed to recover their cost before sharing revenue, companies will not have the incentive to invest

Deepak Mahurkar, a leading Oil and Gas analyst in PricewaterhouseCoopers has recently noted in an article: “The Government has taken a very good step. Now what we need are more project and business specific impetus from the Government again, or else, we will miss the bus again.”

The same has been echoed in a recent interview by Vedanta Chief Mr Anil Agarwal: We need to ‘Find in India’ along with ‘Make in India’, he argued. ‘Under the Modi Government, India should be the best place to do business. Today, it is the worst place to do business.’

We need to have clarity on production sharing contracts. There are more than 180 blocks where the contractor is awaiting a contract or extension of an existing contract. These contracts with remunerative terms and conditions must be expedited, to create a favourable condition for companies to do business in India.

Oil has the power to transform lives and landscape. Given its importance, the need of the hour is to facilitate a sound, pro-industry policy framework.

Remember, India is a state of oil have-nots. We are not flush with oil, so it becomes all the more important for us to secure areas with clear traces of hydrocarbon deposits. For a better tomorrow, our today has to be secured and our tomorrow has to be mapped.